K. Liu's Week in Review

Whereas headlines last week were dominated by large strategic acquisitions, this week saw a couple of companies shedding non-core assets. Business intelligence platform provider MicroStrategy (MSTR) sold its Voice.com domain for $30 million to Block.one, which plans to utilize the domain name to support the launch of a new blockchain-based social medial platform, Voice. MicroStrategy maintains ownership of another 15 domain names that may be of interest to others. Nuance Communications (NUAN) continued to streamline its operations ahead of a planned spin-off of its Automotive business by exiting its non-core Subscription Revenue Services (SRS) business, which provides services to mobile consumers in Brazil and India. Nuance has already sold its SRS operations in Brazil and has entered into a definitive agreement to sell its SRS operations in India. While terms of the transactions were not disclosed, the sale of the SRS business is expected to reduce Q3 and FY ’19 revenue by $4.0 million and $8.0 million, respectively, and lower non-GAAP EPS by a penny in both periods.

In another relatively quiet week for earnings, we tracked results from supply chain planning leader American Software (AMSWA) and two large cap software companies, Adobe (ADBE) and Oracle (ORCL). American Software reported mixed Q4 ’19 results, reflecting higher than anticipated profitability despite a revenue shortfall. Management noted that delays in deal closures that were persistent throughout the year continued to affect new Cloud Annual Contract Value (ACV) bookings in Q4, but also indicated that sales cycles were showing signs of improvement with much of the slipped deals closed early in Q1 and new ACV bookings already eclipsing the amount recorded in the year-ago period. Adobe posted Q2 ’19 results above expectations driven by strength in its digital media business. Guidance for Q3 was slightly short of consensus, but expectations for the full year were left intact. Oracle’s Q4 ’19 results also beat and management guided FY ’20 revenue and non-GAAP EPS ahead of Street expectations. The table below depicts each company’s share price performance for the week, reported results versus expectations, and subsequent consensus estimate revisions for the current fiscal quarter and year.

2019-06-21 KLiu Week in Review Data.png

As for other notable news this week, Monotype Imaging Holdings (TYPE) announced the departure of its Chief Financial Officer, Tony Callini, who is leaving to join a privately-held technology provider to the music industry. Chris Brooks, Vice President, Finance and Investor Relations, has been named interim Chief Financial Officer, and a search for a permanent successor is underway. Days later, Bloomberg reported that the company is exploring strategic options after receiving buyout interest from private equity firms. We note that in early 2018, Monotype disclosed that the company had approached 28 parties, including 18 strategic buyers and 10 financial buyers, to explore a possible sale or merger of the company. While 10 parties expressed interest and entered into confidentiality agreements, no definitive offers were received. Circumstances have certainly changed since then considering the current stock price, the transition of approximately 85% of printer OEM revenues to subscription-based arrangements, the growth and profitability profile of Olapic, and the momentum in the enterprise business.

Elsewhere, Everbridge (EVBG) announced the appointment of David Meredith as Chief Executive Officer and a member of the Board of Directors, succeeding Jamie Ellertson, who will transition to his new role as Executive Chairman of the Board of Directors. Mr. Meredith previously served as Chief Operating Officer at Rackspace. Pegasystems (PEGA) appointed Claudia Rodriguez to its newly created role of inclusion and diversity leader. Ms. Rodriguez previously served as senior manager of inclusion and diversity in Accenture’s Global Center of Expertise. Trâm Phi joined DocuSign (DOCU) as its new general counsel after previously serving as chief legal officer at Imperva. Twilio (TWLO) announced the appointment of former General Electric Chairman and Chief Executive Officer, Jeff Immelt, to its Board of Directors. Finally, Zscaler (ZS) announced the hiring of James Cater as Vice President and General Manager of EMEA. Mr. Cater previously served in a similar capacity at NetScout Systems (NTCT).

Mergers and Acquisitions

MicroStrategy Sells Voice.com Domain Name for $30 Million

  • MicroStrategy (MSTR) announced the sale of its Voice.com domain name for $30 million in cash.

  • The domain name will be used by Block.one to launch its new blockchain-based social media platform, Voice.

  • MicroStrategy retains ownership of other domain names that could be sold, including Alert.com, Arthur.com, Emma.com, Frank.com, Glory.com, Courage.com, Hope.com, iDream.com, Michael.com, Mike.com, Speaker.com, Strategy.com, Usher.com, William.com, and Wisdom.com.

Nuance Accelerates Exit of its Non-Core Subscriber Revenue Services (SRS) Business

  • Nuance Communications (NUAN) announced that the company has exited its non-core Subscription Revenue Services (SRS) business, which provides services to mobile consumers primarily in Brazil and India.

  • The sale of its SRS operations in Brazil has already been completed and the company has entered into a definitive agreement to sell its India SRS operations, which is expected to close in July 2019.

  • Under ASC 605, the sale of the SRS business reduces Q3 and FY ’19 non-GAAP revenue by $4.0 million and $8.0 million, respectively, to $449-$463 million and $1,844-$1,876 million and lowers non-GAAP EPS by a penny in both periods to $0.26-$0.29 and $1.12-$1.20.

  • Terms of the transactions were not disclosed.

Earnings Releases

Adobe Reports Record Q2 Revenue

  • Adobe (ADBE) reported Q2 ’19 results above expectations, guided Q3 slightly below consensus, and maintained prior guidance for FY ’19.

  • Revenue of $2.744 billion (+25.0% Y/Y) was ahead of management’s $2.700 billion guidance and consensus of $2.705 billion. Non-GAAP operating income of $1.045 billion (38.3% margin) also exceeded consensus of $1.024 billion. Non-GAAP EPS were $1.83, beating guidance of $1.77 and consensus of $1.78.

  • Digital Media ARR was $7.47 billion (+5.7% Y/Y); Creative ARR was $6.55 billion (+5.5% Y/Y); Document Cloud ARR was $921 million (+7.6% Y/Y); remaining performance obligation was $8.37 billion.

  • Adobe Stock, the company’s service for stock images, videos, and other creative assets, grew in excess of 25% Y/Y.

  • Adobe Sign continues to contribute strong growth within the Document Cloud business.

  • In Q2, the company announced the availability of Adobe Commerce Cloud, built on the acquired Magento platform, and also announced the global availability of the Adobe Experience Platform at Summit.

  • Guidance for Q3 includes revenue of approximately $2.80 billion and non-GAAP EPS of $1.95, slightly below consensus expectations for $2.83 billion in revenue and $2.05 in non-GAAP EPS.

  • Management’s full year outlook remains unchanged at $11.150 billion in revenue and $7.80 in non-GAAP EPS.

American Software Reports Preliminary Fourth Quarter and Fiscal Year 2019 Results

  • American Software (AMSWA) reported mixed Q4 ’19 results.

  • Total revenues were $26.3 million (-10.5% Y/Y), below consensus of $27.3 million. Adjusted EBITDA was $3.5 million (13.4% margin), in line with consensus of $3.4 million. Non-GAAP EPS of $0.09 beat consensus of $0.07.

  • Key metrics: added 17 new logos for the quarter and 64 for the year, including 33 subscription contracts; Cloud Services Annual Contract Value (ACV) of $17.3 million (+36.2% Y/Y); recurring revenue streams accounted for 56% of total revenues versus 46% a year ago.

  • During the earnings call, management noted that Q4 performance was affected by delays in deal closures, but the company has secured the majority of the slipped deals and has already exceeded the $600 thousand in new ACV closed in Q1 ’19.

  • Subscription gross margin was negatively impacted by a true-up allocation of non-cash amortization of capitalized software, which accounted for $1.1 million of subscription fee costs; excluding this item, subscription gross margin was 77%.

  • Sales and marketing expenses were elevated due to $0.6 million in expenses for the company’s customer conference.

  • The company is seeing an impact on close rates since the hiring of Mac McGary, bolstering confidence in the prospects for accelerating growth, and is also seeing an uptick in transformational projects in the pipeline.

Q4 FY19 GAAP EPS Up 36% to $1.07 and Non-GAAP EPS up 23% to $1.16

  • Oracle (ORCL) reported Q4 ’19 results above expectations and guided FY ’20 above consensus.

  • Total revenues of $11.136 billion (+1.1% Y/Y) were above management’s guidance of (2)%-0% growth Y/Y and consensus of $10.932 billion. Non-GAAP operating income of $5.261 billion (47.2% margin) was ahead of the Street’s $5.043 billion. Non-GAAP EPS of $1.16 beat guidance of $1.05-$1.09 and consensus of $1.07.

  • Fusion ERP and HCM cloud applications suite revenues increased 32% in FY ’19, and NetSuite ERP cloud applications also grew 32% for the year.

  • Verticals revenue increased 19% in the quarter and 32% for the year, while Data-as-a-Service continued to suffer from challenges related to broader privacy issues and declined 15% Y/Y.

  • Added over 5,000 new Autonomous Database trials in Q4.

  • Guidance for Q1 calls for revenues to increase 0%-2% Y/Y to $9.193-$9.377 billion and non-GAAP EPS of $0.80-$0.82, in line with consensus expectations for $9.332 billion in revenues and $0.80 in non-GAAP EPS.

  • For FY ’20, management expects constant currency growth above the 3% increase realized in FY ’19 and a double-digit increase in non-GAAP EPS, implying revenue and non-GAAP EPS of at least $40.691 billion and $3.87, respectively, above consensus of $40.134 billion and $3.79.

Notable News

Claudia Rodriguez joins Pega as Inclusion and Diversity Leader

  • Pegasystems (PEGA) announced the appointment of Claudia Rodriguez as inclusion and diversity leader, a newly created role in which Ms. Rodriguez will oversee the company’s strategy to develop and support an inclusive and diverse workforce.

  • Ms. Rodriguez most recently served as senior manager of inclusion and diversity in Accenture’s Global Center of Expertise.

David Meredith Appointed as Everbridge Chief Executive Officer

  • Everbridge (EVBG) announced the appointment of David Meredith as Chief Executive Officer and a member of the company’s Board of Directors.

  • Mr. Meredith most recently served as Chief Operating Officer at Rackspace and succeeds Jamie Ellertson who is transitioning to the role of Executive Chairman of the company’s Board of Directors.

DocuSign bolsters executive bench with new GC, Trâm Phi

  • DocuSign (DOCU) announced that Trâm Phi has joined the company as its new general counsel, responsible for building, leading, and overseeing legal affairs and risk management for the company.

  • Ms. Phi previously served as chief legal officer at Imperva.

Monotype Announces CFO Transition

  • Monotype Imaging Holdings (TYPE) announced that Chief Financial Officer, Anthony Callini, will depart the company on July 1, 2019 to join a privately-held technology provider to the music industry.

  • Christopher Brooks, Vice President, Finance and Investor Relations, has been named Interim CFO and the company has commenced a search for a permanent successor.

Twilio Welcomes Jeff Immelt to Twilio Board of Directors

  • Twilio (TWLO) announced that Jeff Immelt has joined the company’s Board of Directors.

  • Mr. Immelt is currently a venture partner at New Enterprise Associates and previously served as chairman and CEO of General Electric.

Zscaler Appoints James Cater as Vice President and General Manager of EMEA

  • Zscaler (ZS) announced the appointment of James Cater as Vice President and General Manager for the EMEA region.

  • Mr. Cater will lead the company’s business across EMEA, including the addition and expansion of relationships with local and regional partners.

  • Mr. Cater joins the company from NetScout (NTCT) where he built and scaled the company’s organizations in Europe, the Middle East, and Africa.

Disclosure(s):

K. Liu & Company LLC has received compensation from American Software (AMSWA) for non-investment banking services within the past 12 months.

The analyst, a member of the analyst’s household, and/or an account in which the analyst exercises discretion hold(s) a long position in the common stock of NetScout Systems (NTCT).

Software IndustryKevin LiuADBE, AMSWA, DOCU, EVBG, MSTR, NUAN, ORCL, PEGA, TWLO, TYPE, ZS